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Waddell & Reed's Project E to Aid Growth, Cost Woes Linger

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On Sep 1, 2016, we issued an updated research report on Waddell & Reed Financial, Inc. . The strategy to improve revenue through Project E initiative will support this asset manager’s bottom line in the long run. However, elevated expenses and significant outflows remain major concerns.

Waddell & Reed is making an effort to reform its Retail Broker-Dealer channel as well as incorporate changes in its product offerings through Project E initiative. This will put the company in a competitive position and also enhance its financial planning capabilities and client experience.

As part of this effort, Waddell & Reed is expected to incur implementation costs of $8 million in 2016. Further, the company converted load waived Class A shares into the more widely used Class I shares in June and the platform launch is likely to be in third-quarter 2016.

Driven by share conversion, the amortization of deferred acquisition costs on old advisory programs will accelerate. This will expectedly lead to reduction in direct underwriting and distribution (U&D) costs in 2016 and 2017.

To offset the impact of Project E and decline in AUM, Waddell & Reed has undertaken cost savings initiatives to lower $40 million of its fixed operating expenses through mid-2017. These efforts are expected to reduce general and administrative costs, compensation costs and indirect U&D costs.

However, owing to dismal revenue performance and consistent rise in outflows for the past few quarters, Waddell & Reed is facing problems in regaining investors’ confidence. As a result, the company shares have tanked nearly 37% year-to-date.

Further, mounting operating expenses is a major concern for Waddell & Reed. Though expenses declined in the first six months of 2016, they are anticipated to remain elevated in the quarters ahead as the company is investing in technology initiatives with an intention to modernize and optimize its operations.

Notably, the Zacks Consensus Estimate for 2016 and 2017 remained stable at $2.02 and $1.74 per share, respectively, over the last 60 days.

Waddell & Reed currently carries a Zacks Rank #3 (Hold).

Stocks Worth a Look

Some stocks in the same industry worth a look include Eaton Vance Corp. (EV - Free Report) , Principal Financial Group Inc. (PFG - Free Report) and Federated Investors Inc. . All these stocks hold a Zacks Rank #2 (Buy).

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